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July 19, 2016

Deal drama is heating up the world of health insurance.

The biggest U.S. providers—UnitedHealth Group Inc., Anthem Inc., Aetna Inc., Cigna Corp. and Humana Inc.—are all looking at possible combinations. After a two-year lull in managed-care dealmaking, buyers are feeling more comfortable with the implications of the Patient Protection and Affordable Care Act and ready to put cash to work on deals.

Humana—with a market value of $30 billion—is the most frequently mentioned target, but where there’s one deal, another could follow. No one wants to be left without a partner, knowing that in the end, just three of the big five will likely be left standing.

If the insurers are circling the same targets, “all of a sudden there’s a sense of urgency,” Steve Halper, a New York- based analyst at FBR & Co. said. “It potentially feeds on itself.”

Indianapolis-based Anthem, a $44 billion company, is considering a takeover of Cigna or Humana, a person familiar with the matter said, asking not to be identified because the information is private. The speculation has sent Humana shares soaring. The stock touched a record earlier in June, as the other four insurers also rallied.

Humana is more appealing for Anthem from a strategic standpoint because it would expand the company’s presence in the fast-growing Medicare program, according to Scott Fidel of Deutsche Bank AG. A deal for Cigna, a $40 billion company, would primarily just double down Anthem on the commercial market, he said. Financially speaking, though, Cigna would be preferable to an arguably overvalued Humana, said Chris Rigg of Susquehanna International Group.

Alternatively, Cigna could make a bid for Humana to defend itself against takeover approaches from Aetna or another provider. Aetna, with a market value of $44 billion, has also expressed interest in Humana, a person familiar with the matter said. Because of its larger book of business and broader national presence, Aetna stands to reap more medical-cost synergies from a hookup with Humana than Anthem or Cigna does, according to a June 1 report from Ana Gupte of Leerink Partners.

“Aetna has the most to gain from a good deal,” said Rajeev Kapoor, a health-care partner at consultant firm A.T. Kearney. “Humana makes a lot of sense for Aetna, and Cigna, in my opinion, makes a lot of sense for Anthem.”

One of the few things analysts seem to agree on is that Humana will probably eventually get bought. The other is that UnitedHealth can pretty much do whatever it wants. The $116 billion company doesn’t need a deal as much as the others to grow, but it has the firepower to get involved if it wants. Cigna and Aetna are potential targets. Humana would pose antitrust challenges.

Humana price

Humana will likely command about $227 a share in a takeover, according to the average of six estimates compiled by Bloomberg. That’s an almost 15-percent premium, even after the stock’s 12-percent gain since news of a possible sale first surfaced.

A deal at that price with at least 50 percent paid in cash and $500 million of synergies would be slightly more accretive to Anthem than to Aetna, according to data compiled by Bloomberg. Cigna would need to get at least another $100 million in synergies to have a takeover be similarly accretive, the data show.

The one possible wrinkle to a sale of Humana is if Anthem bids on Cigna instead. Aetna would then be the only logical remaining buyer of Humana, creating a “now or never” situation for UnitedHealth to make a move for Aetna, said Rigg of Susquehanna.

A UnitedHealth and Aetna combination would be the most logical out of all the deal iterations because of the massive cost-cutting opportunities and scale advantages, Joshua Raskin, a New York-based analyst at Barclays Plc, wrote in a June 15 report.

The “M&A plot just continues to thicken,” Fidel of Deutsche Bank said.

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